Surgery Partners, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 10, 2021. This is an annual filing, not a standalone fourth-quarter report, and the filing text does not provide clear standalone Q4 financial results.
Business context
Surgery Partners owns or operates 127 surgical facilities across 30 states: 110 ambulatory surgery centers and 17 surgical hospitals. It held majority interests in 84 facilities and consolidated 107. Surgical Facility Services generated about 96% of 2020 revenue. The company also operated ancillary services; it closed its diagnostic laboratory during 2020 and sold its optical products purchasing organization on December 31.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,860.1 million | $1,831.4 million |
| Operating income | $183.0 million | $235.9 million |
| Operating margin | 9.8% | 12.9% |
| Net income (loss) attributable to Surgery Partners | $(116.1) million | $(74.8) million |
| Net loss attributable to common stockholders | $(155.6) million | $(110.5) million |
| Adjusted EBITDA | $256.6 million | $258.6 million |
| Adjusted EBITDA excluding grant funds | $225.5 million | $258.6 million |
| Operating cash flow | $246.9 million | $129.5 million |
| Cash and cash equivalents at year-end | $317.9 million | $92.7 million |
Revenue increased 1.6%, largely reflecting acquisitions and a new hospital; same-facility revenue declined 1.1%. Same-facility cases fell 13.3%, while revenue per case rose 14.1%, reflecting a recovery weighted toward higher-acuity procedures. Cost of revenues increased to 79.6% of revenue from 76.9%; operating margin contracted. Interest expense rose to $201.8 million from $178.9 million, and the company remained loss-making at the parent and common-stockholder levels.
Reported Adjusted EBITDA includes grant benefits; excluding grant funds, it declined about 12.8% year over year. Operating cash flow benefited from CARES Act support, including Medicare accelerated payments, and cost reductions and deferred spending. Cash flow less cash capital expenditures of $42.9 million was approximately $204 million; this is not a company-reported free-cash-flow measure.
Total debt, including finance leases, was $2.857 billion at year-end, versus $2.581 billion a year earlier. This included $1.543 billion principal on term loans, $545 million of 10% notes due 2027, $370 million of 6.75% notes due 2025, and other secured debt and finance leases. No revolver borrowings were outstanding; $112.5 million was available after letters of credit. The company reported $556.8 million of current liabilities and $801.5 million of current assets. It reported $109.8 million of current Medicare accelerated payments and deferred grants.
Material changes, outlook and unusual items
- COVID-19 curtailed elective procedures from mid-March, with the sharpest case-volume impact in Q2; volumes improved in the second half. Management said the pandemic’s duration and effect remained uncertain.
- The company received approximately $59 million in grants and $120 million in accelerated Medicare payments. It recognized $46.2 million of grants as an operating-expense reduction; grant eligibility and recognition remain subject to evolving government guidance. Accelerated payments must be repaid, with recoupment expected to begin in 2021.
- Management recorded $33.5 million of non-cash impairment charges, including $28.6 million for Ancillary Services goodwill and $4.9 million for Alliance goodwill. It also recorded a $1.2 million additional litigation-related charge.
- A settlement with the U.S. government relating to Logan Laboratories and Tampa Pain required a remaining payment of $30.7 million plus accrued interest as of April 1, 2021. The filing states a prior $46 million charge was recorded in 2018.
- During 2020, the company borrowed $120 million under incremental term loans and issued $115 million of additional 10% notes due 2027. It deferred $16.9 million of employer Social Security taxes, payable in installments in December 2021 and December 2022.
- Management stated that cash, operating cash flow, revolver availability, financing access, government assistance and cost actions were expected to meet short- and long-term liquidity needs. This is not quantified earnings guidance. The company disclosed no formal revenue or earnings forecast.
- Subsequent to year-end, the company completed an equity offering in February 2021, raising $249.2 million net, and extended the revolver maturity to February 2026 while increasing commitments by $50 million.
Key risks and contingencies
Principal risks include further COVID-related volume disruption, labor and supply constraints, reimbursement or payor-mix changes, dependence on physician relationships, healthcare regulatory and billing compliance, and collection of patient receivables. Leverage and substantial interest costs constrain financial flexibility; variable-rate debt and LIBOR transition also create exposure. Other concerns include potential repayment or adjustment of government support, legal and regulatory proceedings, the tax receivable agreement (estimated remaining payments up to $43.2 million), and Bain Capital’s control of the company.
Important facts for investors to verify
- Whether surgical volumes and same-facility performance recovered further after year-end, and how current trends compare with pre-pandemic levels.
- The amount and timing of Medicare accelerated-payment recoupments, payroll-tax deferrals, and any changes to recognized CARES Act grants.
- Cash generation and debt-service capacity excluding government support, including interest costs and upcoming debt maturities.
- The final payment, interest, and any remaining exposure under the Logan Laboratories/Tampa Pain settlement, along with the status of related proceedings.
- Whether acquisitions, divestitures, laboratory closure, and optical-business sale affect ongoing earnings comparability or future growth.